Poor productivity threatens living standards

The credit crunch that put the global financial system to such a stern test in late 2008 has morphed into an equally unsparing trial of political systems.

The consequences of the massive transfer of debt from private to public balance sheets as governments and central banks rushed to bail out crippled banks and inject liquidity into frozen credit markets have crystallised into nasty political trade-offs.

In the US, the political system has virtually frozen in the face of tough choices about cutting spending and increasing taxes while, in Europe, leaders tiptoe around the unpalatable choices of abandoning the euro zone altogether or turning it into a full-fledged fiscal union.

Political risk is usually used to describe uncertainty stemming from changes in government or laws but recent sharemarket gyrations show investors are just as sensitive to the risk that US and European political systems will prove incapable of delivering the changes needed to resolve their respective sovereign debt crises.

It makes the vigorous and concerted action taken by the governments and central banks of many major countries in response to the collapse of Lehman Brothers and the seizure of credit markets almost three years ago seem all the more remarkable.

Confronted with the unknown but fearful of another Great Depression, governments and central banks from Canberra to Beijing, London and Washington slashed interest rates, guaranteed banks and injected billions into financial markets and household and business balance sheets.

It was a moment that showed that, when faced with a dire threat, policymakers and the systems within which they work can respond quickly and decisively.

But politicians in the US and Europe seemed to have learned little from the episode and, as serious as the current situation is, are intent on playing a dangerous and damaging game of brinkmanship.

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As Reserve Bank of Australia governor
Glenn Stevens
said recently, this has had a chilling effect on confidence around the world, including Australia.

“In both the US and European cases, the process of allowing things to go right to the brink of a very disruptive event before an agreement is reached on the way forward has been a source of great uncertainty and anxiety around the world," Stevens said in a speech on July 26.

The federal government has been at pains to remind everyone that Australia is not immune from events offshore but the continued strength of growth in China and east Asia – which last year bought 78 per cent of the nation’s exports – has provided the country with a handy buffer.

But lest Australians feel more than a little smug as they watch the political and economic train wrecks from afar, there are reasons to be concerned about the rate of progress on key reforms here.

Stevens described the 140-year high in the nation’s terms of trade as being “potentially the biggest gift the global economy has handed Australia since the gold rush of the 1850s".

There are worrying signs, though, that this gift is being squandered.

Rather than seizing this moment as an opportunity to drive reform, governments around the country are showing a disturbing tendency to lapse into partisan squabbles and stand-offs that may only serve to beggar us all.

Ironically, at the national level, where the position of government is most precarious, some signal changes are in train.

From a minority position, Labor has nonetheless been able to point to notable progress in some heavily contentious areas beyond its high-profile push for a carbon tax.

Last week’s Council of Australian Governments (COAG) meeting signed off on the national health reform agreement, and the government has flagged far-reaching changes to the funding and provision of aged and disability care. It has concluded the Tasmanian forestry deal and is pushing ahead with a (vastly watered-down) tax on mining super profits.

But as the Reserve Bank ramps up its warnings about the nation’s deteriorating productivity performance, the progress made by federal, state and territory governments towards establishing a seamless national economy through COAG appears patchy.

The need for productivity improvement is urgent.

In a paper presented at an RBA conference last week, Grattan Institute program director
Saul Eslake
reported that market sector productivity slowed from an average annual gain of 1.4 per cent throughout the 1990s to just 0.2 per cent in the past decade.

The RBA has warned that without a substantial improvement, living standards, which have been propped up by the soaring terms of trade, will eventually slide.

There has been some progress on measures that will help improve productivity.

Uniform occupational health and safety laws are set to come into effect from January next year and, from mid-2012, a national system to harmonise trade licences will come into effect.

But 14 of 27 priority reforms covered by COAG to streamline interstate regulation are yet to be implemented and fractious relations between the commonwealth and coalition governments in NSW, Victoria and Western Australia heighten the risk that much-needed changes will be held hostage to petty point-scoring and partisan politics. Sound familiar?